MOHNISH PABRAI 00:08
In 1994, I was 30 years old and I heard Warren Buffett for the first time. And when I heard of Warren, I had really no knowledge of investments or capital allocation or any of those things.
And what I was lucky about in 1994 was the first biography of Warren Buffett just come out at the time. And so, I could look at this track record that Warren Buffett have from 1950s to 1993, the 44 years track record.
And over the 44 years period, he had compounded money at 31% a year. And if you compound money at 31% a year that I will show you later, if you compound money at 26% a year. It will double every 3 years. 1.26 x 1.26 x 1.26 = 2.
And if you are compounding at 31% a year, you will double your money in little less than 3 years. Maybe, 2 and the half years, 2.6 years or something. So, with Warren Buffett for 44 years at compounded at 31%. He was already on the 18th square of the chessboard, when I first heard of – because, it compounded.
And I thought back to the story about the chess and so on and I thought of Warren. And I said "Wow, this guy actually playing out that chessboard story." And that story is very powerful because if you keep doing it and he keeps doing it. He is going to become the wealthiest person on the planet. And he became the wealthiest person on the planet so it works.
And when I was thinking about all these things. Like I said, I never been to business school and really haven't thought much about investments. And a few things kinda stood out for me. You know, basically the investing world hardly anyone followed Warren Buffett and his approach to investing in 1994 or even today. And hardly anyone had the returns that he had. So the investing professional if you will, did not follow Warren's approach to investing and did not have the results Warren Buffett had.
And I thought those two – those two facts are positive fact. I thought that the Buffett approach was the approach to high rate of compounding. And if you didn't follow the approach, you're basically not going to go anywhere. And so I have these thoughts that these things were related.
And so – Buffett's approach look replicable and no one who replicate it. So I said "You know, I like this compounding, I like this 26% or 31% a year and why not I give it a try?"
How many of you have seen the movie 'Forrest Gump'? So we get answers in the extreme front of the room and the extreme back of the room. How many people in black shirts have seen the movie 'Forrest Gump'? Okay, so when you go to IIT. On Youtube download the movie and watch the movie, so you will appreciated it – actually won an Academic Award it's a great movie. And I'm just going to play for you about 1 minute or 2 minutes right now.
FORREST GUMP 04:05
So I never went back to work for Lieutenant Diane though, it did take care of my Bubba Gump money. He got me invested in some kind of fruit company. And so then I got a call from them saying "we don't have to worry about money no more." And I said "that's good one less thing."
MOHNISH PABRAI 04:24
So Forrest Gump is my hero, I like Forrest Gump. And you know, after I decided to do this – trying to do this replication of Warren Buffett's compounding I changed my license plate. And of course, I think I might have mentioned to some of the Dakshana scholars last time. But maybe for the people who are not in black shirts.
What is my license plate mean? Maybe the ISB crowd can take a guess. So that's my real California license plate that Is on my real 6 Series BMW Convertible. So what does the plate mean?
AUDIENCE MEMBER 05:13
Compounding at 26%?
MOHNISH PABRAI 05:16
Yeah, but how do you come out with that? How does that mean that? Yeah, go ahead.
AUDIENCE MEMBER 05:26
Compound like Buffett 26?
MOHNISH PABRAI 05:30
AUDIENCE MEMBER 05:31
Compound like Buffett 26.
MOHNISH PABRAI 05:33
AUDIENCE MEMBER 05:35
Compounding at lower bound 26? (Laughs)
MOHNISH PABRAI 05:38
AUDIENCE MEMBER 05:39
Lower bound 26.
MOHNISH PABRAI 05:40
No, the LB is not lower bound. Anyone else? Yeah.
AUDIENCE MEMBER 05:47
LB means pound.
MOHNISH PABRAI 05:49
AUDIENCE MEMBER 05:50
So compound at –
MOHNISH PABRAI 05:51
Were you here last year?
AUDIENCE MEMBER 05:52
MOHNISH PABRAI 05:53
So you are cheating on the test? (Laughters) Okay, so the LB means pound. You know, it's abbreviation for pound so 'Compound 26.' Alright, so that's my license plate I make sure I looked at it everyday.
And so in 1994, I was 30 years old. I had just sold some assets in this business I was running. Straight out of business and just sold a small portion of it. And basically, I ended with $1 million in the bank. And I really have no use for the money. First, I actually had money kept in the bank. And at the same time, I read this Buffett biography and the chess overlay with his 18 square.
So I said "Hey, you know, why don't we focus on the very simple formula?" 1.26 cubic equals 2 – even I can handle that math. Even though, I didn't go to IIT. And I decided to play a 30 years game and so, the 30 years game I decided to play was that – If you compound at 26% a year, your money is going to double every 3 years right?
And if it double every 3 years then 30 years, 2 to the power of 10. What is 2 to the power of 10?
AUDIENCE MEMBER 07:22
MOHNISH PABRAI 07:24
1024, so forget the 24 let's round it to 1000. So I have a million dollar, the plan was to compound at 26% and so in 30 years, I should add 3 zero to that because it's 1000 times whatever you had and so, it becomes a billion which is a better number than a million.
And so I said "Lets go for the billion." And my thought was even if I fail right 90% or 95% or even 97%. It is still okay all those numbers are okay. So I decided, I will play this game. And of course, my hero Swami Vivekananda told me just like I tell all Dakshana scholars, you just take up one idea make that idea in your life, think about it, dream of it, live on that idea. Let the brain muscles and nerves let every part of your body be full of their idea and just leave every other idea. That is the way to success.
And so I think Swami said that for my benefit to compound money. That's my take on it anyway. So anyways, this is what happened, you know. In 1995, I started putting that million dollar to work and for the next four and the half years on 95 till the middle of June or below the year in 1999. It actually grew at 43.4% way above that 26% and that $1 million had become $5.1 million.
So I said, "alright man, I knew this could be done." We got it done and then, you know, I have all these friends I actually tell them, you know, different stocks they should buy and they should make lot of money with all those stocks tips I used to give them. So they came to me and said "Listen, the stock tips were very random. We want you to manage some money for us then you do what you want and we can have some benefit of that."
So in July 1st of 1999, I set up Pabrai Funds and it started with $1 million from eight friends of mine, I also put a $100,000. And from 1999 to 2007 – middle of 2007, 8 years. Pabrai Funds compounded before fees at 37.2% a year and of course, I get paid outrageous fees and so after fees, it was 29.4% but both numbers are perfectly fine.
So now, you know, more than 12 years since I started this and things were working really really well. Again, pat myself at the back, you're doing well and then all hell broke loose. And for the next 21 months, we compounded at minus 47.1% and I can just tell you if you compounded at minus 47.1%, the cars starts going in reverse the same thing happened in reverse really fast.
And thankfully that game were ended in 2009. And then, for the last 4 years, we have been compounding back again at about 32.8%. So now, it's been 18 and a half years actually that slide is wrong is 18.5.
But the numbers are right, it's a 25.8% so we undershot by 0.2%. But we have 11 and half years to go, maybe I can make that up. We will see.